Banking: BoNYM says NY's AG has it all wrong

The lawsuit relates to foreign exchange ("FX") services the company provided to certain institutional clients under its "standing instruction" system.

A statement from BoNYM issued yesterday after the AGNY issued proceedings says

"The claims in this lawsuit are flat out wrong, both on the law and on the facts. They reflect a fundamental misunderstanding by the Attorney General and his staff of the role of custodian banks and the operation of institutional FX markets. ....

"All of our FX alternatives offer our clients valuable services at a competitive price in a transparent market. The Attorney General's lawsuit ignores the benefits our standing instruction service provides to our custody clients and their investment managers, who freely choose to use it. The Attorney General is in essence attacking BNY Mellon for operating a profitable business, suggesting that we should provide our valuable FX services at cost – something no rational commercial institution would do.

"It is particularly disturbing that the Attorney General deliberately ignores that BNY Mellon acts as principal in standing instruction transactions, which provide real value to our clients. In standing instruction transactions, BNY Mellon buys currencies from and sells currencies to institutional custody clients at 'wholesale' prices that are significantly better than they could obtain from other providers, particularly for transactions of a similar 'retail' size. Our U.S. trading desks publish a guaranteed range of prices each morning, and clients and investment managers can choose to opt out of the standing instruction program every day if they don't like the range of rates we are guaranteeing. Our clients and their investment managers have full access to daily reports that detail the prices they received for each transaction, so they are able to compare our pricing to other options in the market and assess the value provided. "

The bank says that the AGNY is trying to second guess the contract and arrangements between the bank and its customers and to interfere with commercial matters such as pricing. That, the bank implies, is likely to end up no better for customers than the recent forced change in payment card charges. In that case, reductions in usage fees are being transferred to card-holder and account-holder fees, an entirely predictable move by the banks.

In the BoNYM case, the bank points out that the system saves everyone time and money and in recognition of that, customers get access to wholesale rates which are better than the rates they would get if they handled their corporate forex on an ad hoc basis. To provide the automated system (from which the customer can opt out if it doesn't like the trade being offered) BoNYM charge a fee including a profit element. The implication is that, if the system has to be provided at cost then the beneficial rates would need to be modified.

BoNYM says that the AGNY is "prosecutorial overreach." That is an argument that prosecutors are going to have to get used to after a court recently dismissed a long-standing, high profile case saying that it was fed up with prosecutors constantly trying to stretch the law to reach places it was never intended to go.

But here the situation is somewhat different: the AGNY has not tried to allege criminal conduct: the action is in the civil courts. BoNY M says it will not be cowed into admitting some non-existent wrongdoing just to avoid bad headlines.

The AGNY badly needs a high-profile win. Eric T. Schneiderman is far behind e.g. California's Kamala D Harris in the "look what we've done for our citizens" stakes.

And the AGNY's PR machine is pushing all the right buttons: a statement issued in advance of the BoNYM statement says "The lawsuit follows a lengthy investigation during which the Attorney General’s office uncovered extensive evidence and sworn testimony that revealed BNY Mellon’s elaborate scheme to lure customers with promises it did not intend to keep. The Bank guaranteed customers of its Standing Instructions program that they would receive the “best rate of the day” or the “most competitive/attractive FX [foreign exchange] rates available to us.” It claimed to monitor exchanges agents completed “to ensure that the best rate is attained for our clients,” and advertised that the Bank netted buy and sell orders for the benefit of clients and that Standing Instructions execution was “free of charge."

"The Attorney General’s investigation found that BNY Mellon’s statements were false. Far from giving clients who used the Standing Instructions program the “best rate of the day,” or “best execution,” the Bank provided the opposite: the worst or nearly the worst of the pricing rates available to the Bank that day. BNY Mellon employee testimony admitted the Bank neither sought the best rates for Standing Instructions customers nor provided best execution. BNY Mellon concealed its pricing practices from its clients, and made its profit by pocketing the difference between the worst price of the day, which it charged its clients, and the actual market price at the time of the trades. "

In another part of the statement, the AGNY says that the bank was "fraudulent." That's a hard hill to climb in civil proceedings - even more than in a criminal trial. The AGNY acts as lawyer for NY City Pension funds and it is on that basis that the proceedings are brought, rather than as state prosecutor.